Apprenticeship levy: how will it work in practice?

The apprenticeship levy is likely to lead to a surge in youth recruitment. But how will it work in practice?

The chancellor’s Autumn Statement last month confirmed that, from April 2017, employers with a wage bill of more than £3 million will have to pay a 0.5 per cent levy to fund apprenticeships. The broad aim is to raise £3bn a year to meet a target of three million new ‘high quality’ apprenticeships by 2020. Here’s what we know so far.

Who will the levy apply to?

George Osborne estimates that the levy will be taken from around two per cent of businesses, based on gross salary. This would mean an employer of 250 staff with a payroll of £5 million would pay £25,000.

John Harding, from the PwC employment solutions team, thinks the levy will be taken from companies with around 120 staff or more. But the £3 million threshold may lead some employers to consider ways of reducing their wage bills. “We may see employers deferring bonuses or encouraging people to work through personal services companies to move that money off PAYE,” says Harding.

What do organisations get in return?

All employers will receive a £15,000 allowance to offset the payment of the levy, paid in vouchers. According to skills minister Nick Boles, “employers in England that pay the levy and are committed to training will be able to get out more than they pay in” – but there is little firm detail on how they will receive this additional support.

How will employers be able to spend the money?

The government will create an online portal known as the Digital Apprenticeship Service, which all organisations will have access to, regardless of whether they have contributed to the levy. Employers can use the portal to ‘shop’ for apprenticeships, find accredited training providers and pay for training with their digital vouchers. But Andy Smyth, chair of the Industry Skills Board and development manager for vocational training at TUI UK & Ireland, worries whether this ‘virtual’ money could put employers off. “This system will not recognise, for funding purposes, the training that is delivered by the employers themselves,” he says.

“The exceptions to this are the very large employers funded directly by the Skills Funding Agency, and there are fewer than 100 of these compared to more than 20,000 levy-paying organisations.”

What training will be covered?

The plan is to reform the current batch of apprenticeship frameworks so they become ‘standards’, developed in conjunction with employers. Work has already begun on this through the government’s Apprenticeship Trailblazer programme, which has published 194 standards, of which 60 are either higher or degree apprenticeships. In April 2017, when the levy commences, the government will establish an Institute for Apprenticeships, where employers or groups can submit apprenticeship standards and assessment plans. In the interim, the government will stagger the withdrawal of funding for new starters on old, framework apprenticeships.

How will the government police the quality of apprenticeships?

The ambitious target of three million apprenticeship starters by 2020 has prompted concerns that it could lead to a ‘race to the bottom’ in terms of quality. As Mark Beatson, chief economist at the CIPD, says: “We’d argue that the three million target should not be sacrosanct, and that quantity should not trump quality.”

One of the key roles of the Institute for Apprenticeships will be to oversee quality, and apprenticeships will need to last a minimum of 12 months and involve at least 20 per cent off-the-job training.

What will happen to L&D funding as a whole?

The CIPD surveyed 275 employers on their views on the levy, and 30 per cent think it will encourage them to develop apprenticeships to build key skills. However, a further third feel it will cause them to reduce their investment in other areas of workforce training. Tony Moloney, head of skills and education at energy company National Grid, believes there will be a range of reactions, from “petulance to compliance”.

“On the petulant side, we could see companies [avoid the levy by] going to the graduate market instead and deskilling them, in which case the government doesn’t get its numbers and no one wins,” he says. “On the compliance side, employers might try to create a framework where everything is an apprenticeship, which drives up volume – but not quality.”

Why has the government introduced this levy?

“Overall, there has been a steady decline in the amount and quality of training undertaken by employers over the last 20 years. This has been bad for UK productivity,” says Boles. The levy, he claims, will reverse this trend and push the quality of apprenticeships up so that they are considered a viable alternative to university and will also address worsening skills gaps in the UK workforce.

Amanda Nuttall, director of apprenticeships and professional development at the Association of Proposal Management Professionals, believes putting employers more in control of apprenticeship content will drive uptake: “They get to determine what skills are developed and how they will be assessed, and I think being more involved will create real buy-in.”

What questions still need to be answered?

There are still a number of issues to be clarified before the levy comes in. For example, how will funding be allocated to devolved administrations? The levy will be taken from employers UK-wide, but it has not been decided as to how Scotland, Wales and Northern Ireland will be able to access the funds raised. Furthermore, levies already exist in some industries, such as construction. Will large companies in those sectors have to pay twice?

Finally, we know that the money will be drawn from PAYE, but the full mechanics of this have not been confirmed. Employers will need to engage closely with their payroll software providers to clarify how the money will be taken and avoid any potential hiccups when the levy is introduced.